Lagarde, in Berlin, tells Germany — and the rest of Europe — to pay up

International Monetary Fund Managing Director Christine Lagarde warned of a “1930s moment” for the world economy if Europe does not solve its financial problems and said Germany must contribute more money to rescue efforts if a disaster is to be avoided.

In a public appeal Monday at a Berlin think tank, Lagarde voiced the growing unease among IMF officials about Europe’s potential to derail the world economy. Any number of events — a messy default in Greece, a bank failure, a disruption in the region’s financial markets — could trigger global economic turmoil.

To guard against such a scenario, Lagarde told the German Council on Foreign Relations that the nations using the euro — especially Germany — need to commit more money to backstop troubled governments and banks on the continent.

Without such funds, Lagarde said, “we could easily slide into a 1930s moment. . . . A moment, ultimately, leading to a downward spiral that could engulf the entire world.”

She said the 17 euro-zone countries also must move quickly to integrate their economies as deeply as they integrated their monetary systems with the creation of the common currency. Failure to act, she said, could precipitate a crisis comparable to the Great Depression.

“The world needs a strong leadership role from Germany today, and it is Germany’s core interest to provide such a role,” Lagarde said, acknowledging the frustration felt elsewhere in the world that a wealthy region such as Europe can’t muster a convincing response to its problems.

European officials have been debating a variety of approaches to a crisis that has become increasingly complex and self-reinforcing. Its origins were in the burdensome levels of government debt run up by Greece. The Greek struggles have prompted questions about the general health of Europe’s financial sector and raised the possibility that the government of Italy — one of Europe’s largest economies — might in turn be unable to repay its trillions of dollars in bonds. In recent months, the entire euro zone has faced a mounting crisis of confidence over whether it can survive.

Negotiators continued Monday to debate plans to restructure Greece’s debts.

European finance ministers, meanwhile, met in Brussels to debate some of the same issues raised by Lagarde, such as whether and how to raise more money for a regional bailout fund. In particular, the officials discussed whether to extend the life of a temporary bailout fund after a new, permanent fund is set up later this year. That would boost the money available to fight the crisis by about $325 billion.

The issue of the bailout fund is among Europe’s most sensitive political topics. It is forcing a region that prides itself on collegiality and democratic consensus to confront the uncomfortable questions of how much wealthier nations should pay to prop up weaker ones and how broadly the economic troubles of each euro nation should be shared by the region as a whole.

This debate is familiar territory for Lagarde from her days as France’s finance minister. But her comments Monday are the most pointed she has made regarding Germany since becoming head of the IMF last year.

Officials in Berlin did not respond directly to Lagarde’s call for Europe to build a larger financial “firewall” to contain its crisis. But German Chancellor Angela Merkel said she agreed that the euro area needed to “move forward on the path of a political union” — a precursor, Germany officials say, to closer economic integration.

Europe’s dominant economy, Germany has made numerous concessions to bail out the deeply indebted governments of Greece, Portugal and Ireland but has not contributed the larger amounts many analysts and officials say are needed to resolve the crisis.

German officials have also resisted proposals for “euro bonds,” issued jointly by European countries, and other mechanisms that would create a more integrated European economy. German officials fear that these approaches would tie the country’s credit rating and expenses more closely to its less successful euro-zone partners.

Germany is the European country least affected by the two-year-old financial crisis. The country is enjoying low unemployment and record low bond rates, although economic growth has recently slowed as the entire euro region appears headed for a new recession.

Despite numerous rounds of summits, IMF and other officials say Europe’s policies remain inadequate. The region’s banking system is weak, government debt and bank credit markets are not functioning, and Greece is still at risk of a general default on its bond payments.

The IMF is preparing to issue new forecasts this week of slowing world growth. Last week, the Standard & Poor’s credit-rating agency stripped France of its AAA rating.

IMF officials are pushing to raise about $500 billion from around the world to bolster the agency’s ability to respond, particularly to help nations in Eastern Europe or elsewhere that might suffer economic fallout from the euro zone.

Agency officials want Europe to raise a similar amount on top of the money already proposed for the existing regional bailout fund.

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